Debt is not one-sided. While the headlines scream at us about how much debt Americans carry and how much people struggle to make their payments- no one mentions there are different kinds of debt. Debt’ is not just a catch-all term. We use it that way, but many types of it can mean different things for your money. Today we cover what you need to know about revolving debt vs fixed payment debt. What are the differences? Is either one good debt?
Revolving debt is linked with credit that refreshes itself as you pay off balances. More specifically, as you pay off your bill each month, your credit limit is restored, and you have access to all that credit all over again. Interest rates with this type of debt can fluctuate over time.
Fixed-term debt is linked with credit that disappears as you pay it off. These debts are like student loan debt of mortgages. As you pay off the balance of these loans, you wipe out your debt and credit entirely. Unlive revolving debt, you can not use the equity, or what you paid in, to accrue more debt. Interest rates with this are fixed and there is usually a set amount of time you have to pay your debt back.
Good VS Bad Debt
Is there a such thing as good debt? Many people believe good debt is a thing, and mortgages and student loans typically fall under this category. They believe these debts allow you access to higher wages and a better retirement. Think of these debts as debts that, in the long run, have a high return on investment.
Credit card debt, or personal loans with high-interest rates, are usually seen as bad debt. These debts are reoccurring and often spent on non-essential items. These items include things like eating out at restaurants, clothes, travel expenses, and other miscellaneous entertainment and experiences. These debts or items have no return on investment values.
When it comes to good and bad debt or revolving debt VS fixed payment debt, it’s all about how you use your credit lines and manage your money. Be mindful some predatory lenders will gut you with interest rates, and there are no guarantees that your fancy degree will land you a high paying job. Lots of things about our system are a gamble, but you can control your spending to a degree, and flex those self-control muscles to keep your credit is good shape.
How to Deal With These Types of Debt
Firstly, never take out more credit than you actually need. Just because your eligible for $40,000 in student loans doesn’t mean you need to take out that much. Be careful about how much credit you apply for, and look for ways to supplement your credit. You can do this by reducing your spending and lowering bills or picking up a side hustle.
Secondly, when it comes to revolving credit like credit cards, only use a small percent of your available credit. This helps your credit score and ensures your bill won’t get too high. Remember: just because you have a credit card with a $7,000 monthly limit doesn’t mean you need to spend that much! You need to keep your card utilization under 30%.
Finally, always make on-time payments. If you can, save on interest by making more than the minimum each month! It’s more important to make regular on-time payments. Regular payments also help your credit score, and they keep those debt collectors off your back.
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